Valuation of Supplies under GST

Section 15 of the CGST Act, 2017 deals with a situation where supplier and the recipient of the supply are not related persons.

In case supplier and the recipient of the supply are related person Rule 28 of the CGST Rules, 2017 will apply. As per Rule 28 of the CGST Rules, 2017- “Value of supply of goods or services or both between distinct or related persons, other than through an agent” provides the valuation methods for the determination of value of supply. Rule 28 is reproduced below:

“The value of the supply of goods or services or both between distinct persons as specified in subsection (4) and (5) of section 25 or where the supplier and recipient are related, other than where the supply is made through an agent, shall –

a. be the open market value of such supply;

b. if the open market value is not available, be the value of supply of goods or services of like kind and quality;

c. if the value is not determinable under clause (a) or (b), be the value as determined by the application of rule 30 or rule 31, in that order.

Provided that where the goods are intended for further supply as such by the recipient, the value shall, at the option of the supplier, be an amount equivalent to ninety percent of the price charged for the supply of goods of like kind and quality by the recipient to his customer not being a related person.

Provided further that where the recipient is eligible for full input tax credit, the value declared in the invoice shall be deemed to be the open market value of the goods or services.

Accordingly, the Rule 28 of the CGST Rules, 2017 provides 4 methods to determine the value of supply, are as follows:

1. Open Market Value (“OMV”) Method

2. Like kind and Quality Method (Or comparable method)

3. Cost Plus Method (Rule 30 ) - Rule 30 – If value of supply of goods & services are not determined with the help of Rule 27 to Rule 29, than the value of supply shall be 110% of the cost of such supply.

4. Residual Method (Rule 31 ) - Rule 31 – If value of supply of goods & services are not determined with the help of Rule 27 to Rule 30, than value of supply shall be determined using reasonable means consistent with the principals and general provisions of this chapter.

5. Resale price Method

Section 15 of the Central Goods & Service Tax Act and Valuation Rule 27 to 35

The value of a supply of goods or services or both shall be the transaction value, which is the price actually paid or payable for the said supply of goods or services or both where the supplier and the recipient of the supply are not related and the price is the sole consideration for the supply.

Rule-27 - Value of supply of goods or services where consideration is not wholly in money

If supplies are made against barter, exchange or partially in money & exchange of goods & services then the consideration is not wholly in money. In this case Value of Supply will be:

· Open market value of such supplies;

· If open market value is not available than

ü Sum total of consideration in money and

ü Amount in money as is equivalent to the consideration not in money

· If the value of supply is not determinable as above, be the value of supply of goods or services or both of like kind and quality

· If the value of supply is not determinable as above

ü Sum total of consideration in money and

ü Amount in money as is equivalent to the consideration not in money as per rule 30 & 31.

Rule-28 - Value of supply of goods or services or both between distinct or related persons, other than through an agent

Rule 30 – If value of supply of goods & services are not determined with the help of Rule 27 to Rule 29, than the value of supply shall be 110% of the cost of such supply.

Rule 31 – If value of supply of goods & services are not determined with the help of Rule 27 to Rule 30, than value of supply shall be determined using reasonable means consistent with the principals and general provisions of this chapter.

Under GST regime, in Indian context, supply of goods and/or services between distinct person, as described in section 25(4) and (5) of the CGST Act, 2017, and related person, as defined in an explanation (a) attached with section 15 of the CGST Act, 2017, would be subject to levy of GST.

Therefore, it is important to determine the correct value of supply of goods and services to distinct persons or related persons to avoid the litigation.

Related Persons:

Under GST, as per explanation (a) attached with section 15 of the CGST Act, 2017, persons shall be deemed to be “related persons” if––

i. such persons are officers or directors of one another’s businesses;

ii. such persons are legally recognized partners in business;

iii. such persons are employer and employee;

iv. any person directly or indirectly owns, controls or holds twenty-five per cent. or more of the outstanding voting stock or shares of both of them;

v. one of them directly or indirectly controls the other;

vi. both of them are directly or indirectly controlled by a third person;

vii. together they directly or indirectly control a third person; or

viii. they are members of the same family.

Distinct Persons:

As per section 25(4) of the CGST Act, 2017, a person who has obtained or is required to obtain more than one registration, whether in one State or Union territory or more than one State or Union territory shall, in respect of each such registration, be treated as distinct persons for the purposes of GST Act.

As per section 25(5) of the CGST Act, 2017, where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment, has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of GST Act.